Question

Espana Corporation purchased $136,000 of Hales Incorporated 7% bonds at par in 2023 and reported the bonds at amortized cost. Unfortunately, a combination of problems at Hales and in the debt market caused the fair value of the Hales investment to decline to $88,000 during 2024. When Espana applies the ECL model to account for its investment in 2024, Espana concludes that the credit risk on the investment has increased significantly and calculates that, of the $48,000 drop in fair value, $19,000 of it relates to 12-month credit losses, $34,000 to lifetime credit losses (including the 12-month credit losses), and $14,000 to other factors. Espana’s accounting for this impairment will reduce before-tax net income for 2024 by:

Answer 1

Espana Corporation's accounting for the impairment will reduce before-tax net income for 2024 by $53,000.

Step-by-step explanation:

Espana Corporation's accounting for the impairment will reduce before-tax net income for 2024 by $53,000.

To calculate the reduction in net income, we add the 12-month credit losses ($19,000) and the lifetime credit losses ($34,000), totaling $53,000. The $14,000 attributed to other factors is not considered for the impairment calculation.

Therefore, the impairment will reduce Espana Corporation's before-tax net income for 2024 by $53,000.